Peakon had raised increasingly large amounts of funding since 2016: $4 mm, $6 mm in 2017, $22 mm in 2018, and then $35 mm in 2019.
Here’s our first framework: VCs typically take 20% of a business when they invest. So, we can kind of assume the valuation of Peakon in 2019 was around $35 mm/ 20% = $125 mm.
A good way to check this is to think about another framework: the relationship between employee count and revenues. Peakon had 150 employees in 2019 according to LinkedIn. If we assume they all make $100k/yr, and the business is breakeven, then that’s around $15 mm in revenues/yr. This would imply an 8.3x revenue multiple ($125 mm valuation / 15 mm revenues).
8.3x seems a bit low relative to most SaaS valuations. The $15 mm revenue number was probably a bit aggressive. If they were breakeven, would they be raising capital? Not very likely. So, let’s say their revenue is closer to $8-10 mm, which implies a mid teens revenue multiple, which is much more likely.
Why is WDAY buying Peakon?
Peakon is riding a lot of trends - both COVID and non-COVID related. First, they help engage employees which has become very important in the last 12 months. Next, they are a core part of people analytics efforts for advanced HR teams.
But, we’ll stick to the finance here to truly understand what’s happening.
Workday now has another product they can cross-sell into their customer base, and one that clearly has demand as evidenced by Peakon’s apparent rapid growth and scale. Their account reps will get paid marginally more to cross-sell an expensive and high margin product with recurring revenues. Workday is basically trading a $10k incremental bonus to a given rep for 6 figures of recurring revenues!
This is a great trade in general, and even more so when you think about their stock. It trades at 12x revenues. So, $100k in new revenues means $1.2 mm in new stock value! They can use this value to buy other companies, pay employees, make shareholders happy, etc.
So, they spend $10k in bonus to their rep, and make $1.2 million. Not bad!
Cost of capital arbitrage
Workday is also in a unique position as a more stable, established publicly traded company. They have $2.2 billion of debt that they pay a very low interest rate on.
Peakon is in a very different position as a private, not profitable and not established company. They need to raise money from VCs who require 100% annual returns on their capital, or else they’ll be looking to replace the CEO, head of sales, etc.
So, Workday can take the 5% capital and use it to grow Peakon which is already, unbelievably, making VCs quite happy despite the high hurdle rate they require.
This concept is sort of a complicated discussion and one that we’ll cover in a future Whiteboard Wednesday video.
There are some aspects of HR Tech that are a bit unique relative to other industries that can make this cost of capital arbitrage quite attractive to both acquirors and acquirees!
At the end of the day, spreadsheet rationals only go so far. The numbers can help us understand what actually happened behind the headlines.
The conclusion on this deal is that Peakon is a complimentary product offering riding a lot of waves that WDAY is smart enough to add to their portfolio. And, the numbers strengthen the assumption that this was a great acquisition for all those involved!